interest

Interest

The price paid for borrowingmoney. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest

Money that is paid in exchange for borrowing or using another person's or organization's money. Interest is calculated as a percentage of the money borrowed. There are two kinds of interest, simple interest and compound interest. In simple interest, the interest is calculated only over the original principal amount. For example, if one borrows $1,000 at 3% interest, the interest is $30 (3% of $1,000) each time it is calculated. In compound interest, interest previously paid is included in the calculation of future interest. For example, with the above loan, interest paid in the first month is $30 (3% of $1,000), in the second month it is $30.90 (3% of $1,030), and so forth. Compound interest is more common because it yields more for the lender.

interest

1. Payment for the use of borrowed money.

2. An investor's equity in a business.

Interest.

Interest is what you pay to borrow money using a loan, credit card, or line of credit. It is calculated at either a fixed or variable rate that's expressed as a percentage of the amount you borrow, pegged to a specific time period.

For example, you may pay 1.2% interest monthly on the unpaid balance of your credit card.

Interest also refers to the income, figured as a percentage of principal, that you're paid for purchasing a bond, keeping money in a bank account, or making other interest-paying investments.

If it is simple interest, earnings are figured on the principal. If it is compound interest, the earnings are added to the principal to form a new base on which future income is calculated.

Interest is also a share or right in a property or asset. For example, if you are half-owner of a vacation home, you have a 50% interest.

Interest charges may be fixed or variable and payable weekly, monthly or annually depending on the size of the loan and the length of the loan period. When a loan is extended on a fixed-interest basis the rate remains unchanged throughout the life of the loan. However, in times of inflation the real or effective interest rate as opposed to the loan's agreed or nominal interest rate will fall as inflation reduces the PURCHASING POWER of money. In this case, where the lender is able to vary the interest charge, then the interest rate can be raised to offset the effects of inflation. For this reason, whereas most short-term loans are extended on fixed-interest terms, variable terms are usually applied to long-term loans.

Interest may be computed on a simple or compound basis. Simple interest is based only on the original amount of the loan, whereas compound interest is based on the original amount of the loan plus previous accumulated interest. For example, a £100 loan paying simple interest at 10% would accumulate to £110 at the end of the first year and £120 (i.e. £100 + £10 + £10) at the end of the second, whereas with compound interest the loan would accumulate to £121 at the end of the second year (i.e. £100 + £10 + £11 [10% of £110]). See INTEREST RATE, APR.

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